Making EU Buildings Energy Efficient

“We are on the brink of a revolution.”

Luca Bertalot, EeDaPP Project Coordinator

and

Secretary-General of the European Mortgage Federation - European Covered Bond Council (EMF-ECBC)

Mr. Bertalot’s intriguing words are not an exaggeration.

He’s not talking about a chaotic riot on the streets of Paris.

The revolution he speaks of is part of a larger phenomenon: The Green Revolution.

And while this revolution might or might not create a new model for society or state, it will definitely create a new model for energy and sustainability.

The Energy-Efficiency Mortgage Initiative is just one of the many initiatives that are backing this revolution.

In other words, they’re helping Europe “go green”.

On February 11th, the initiative held a roundtable meeting at the European Mortgage Federation, less than a kilometre away from the European Parliament.

Financial institutions, supporting organisations, and the advisory council gathered in the European Quarter of Brussels.

The area always feels like important things are happening and, on that Monday, something extremely important was happening indeed.

The meeting aimed to inform and clarify certain aspects of the initiative, as well as to keep participants up to date on progress and answer any questions.

And the attendees had many questions on their minds.

"What is our role in this?"

"What are the next steps?"

"How do we access data?"

"Is it worth it?"

"Will we make a difference?"

They settled down in their seats with all these questions buzzing around in their brains and listened to Mr. Bertalot’s introduction. He thanked us for making time to come and then outlined the meeting agenda.

He immediately emphasised the need for data, which, we learned, would be a recurring theme during the meeting.

Then, without further ado, the roundtable began.

EeDaPP: The Correlation Analysis

Luca left the stage to CRIF, a credit reporting agency, who were ready to talk about the data side of the EeMI Initiative - The Energy-Efficiency Data Protocol and Portal (EeDaPP).

EeDaPP’s WP5 focuses on the investigation of the correlation between risk and energy class.

They are creating a data pool consisting of mortgage data provided by a number of financial institutions, among which Unicredit, Intesa SanPaolo, Credit agricole, Banco BPM, and BNL.

This data will be used to substantiate the correlation between an obligors’ real estate energy class and credit risk.

They shared their process:

1. Data collection

2. Data normalisation & data quality

3. Aggregated correlation analysis

4. Correlation on each bank's portfolio

5. Energy Performance Certificate (EPC) data enrichment

Then, they revealed their findings based on the analysis of over 1 million data points (56,000 mortgages).

24% of energy-efficient homes were less risky than average.

17% of the inefficient ones were more risky than average

With the findings, which were similar to a recent Bank of England study, displayed proudly on the board, they asked their question:

“If risk managers had EPC information, would it improve risk calculations?”

Based on the results, it seems that a building’s energy performance does indeed affect credit risk.

Further, they wanted to demonstrate how the same energy performance affects a building’s resilience to the economic cycle.

They used an automated valuation model to estimate home value during the years 2011-2018 and showed how the value of green buildings tends to be more resilient than brown ones.

The value of Brown properties drops by 23%.

Green properties only drop by 11%.

That’s just under half as much!

EMF-ECBC Chairwoman Elisabeth Minjauw of BNP Paribas Fortis decided to step in to ask if additional variables were considered in the calculations.

The representatives shared that they did not have enough data to consider more variables.

Of course, they know that a proper analysis demands income information, career seniority etc., and they highlighted that this information will be given to them by banks.

They also noted that they urgently need more data.

The problem with gathering these data is that banks do and don’t have them.

EPC data are scattered in their databases in such a way that makes it difficult if not impossible to extract the relevant information.

It’s not standardised.

At that point, Daniela Antonini from Banco BPM suggested using the year of construction as a proxy while waiting for these EPC data.

The representative of Banco BPM was certainly on the right track. Feeding the existing data to a machine learning algorithm might be a good way to determine EPCs for the rest of the homes.

CRIF have committed to delivering the data to Ca Foscari University for analysis by August and are determining the feasibility of creating a data warehouse for it.

When the EeDaPP is complete, the data will be open for use.

The Energy-Efficiency Label

The initiative is also creating an Energy Efficiency Label. This is the foundation that we need, an “E” stamp on products to show consumers, investors and local authorities.

The label must be updated every year in order to keep in line with the ever-evolving market.

The EU Commission is preparing a delegated act that will be market reality by the end of 2020.

Green Deal & Taxonomy

Lucia Alessi, Senior Economist at the European Commission Joint Research Centre in Ispra, took the stage to ask one question: “What is green?”

She said that it was important to understand that by “green”, we don’t intend just renewable energy.

Anything that complies with technical screening criteria is green, but this might not be clear yet.

So, a taxonomy is being created. It will be a dictionary that displays the thresholds of “greenness” for many economic activities.

There are, of course, already directives in place to monitor companies and their activities.

The Non-financial Reporting Directive (NFRD) mandates large companies to do non-financial disclosure on their activities, but there is no strict requirement yet.

The NFRD will be revised to double down on certain activities, and taxonomy regulation will become law.

By the end of next year, all organisations will need to disclose based on this taxonomy.

Large corporates are subject to the NFRD, which is great news for banks because they won’t have to impose anything, they just have to ask to share what is already there.

Another piece of good news is that on the technical side there is no difficulty. Ms Alessi described it as “adding some fields to your databases.”

The real problem arises on the legal side because you need to somehow fill up the fields with data that are not there.

Returning to the challenge that EPC data represent, without the real data or a machine learning algorithm, banks can only ask for it.

But the relevant bodies are refusing to share.

This may be caused by local interpretations of GDPR or other issues at national level. For example, in Finland, the law says that EPC data cannot be shared as they are considered personal data.

Some countries even had these rules in place before the birth of GDPR.

In fact, Luca Bertalot rightly said that “You could become yellow in front of them and they still won’t give you the data.”

Wanting to leave us with some good news, the representative shared that mortgages, compared to other green investments of sorts, are overall the easiest to classify as green.

EBA Sustainable Finance

Slavka Eley, Head of banking markets and Innovation at the European Banking Authority (EBA) shared a report on the response to the Commission’s call for advice.

She listed some recommendations:

• Maintain a robust regulatory prudential framework.

Financial stability as a prerequisite to long term investment and decision making.

• Foster adoption of longer-term perspectives by institutions through more explicit legal provisions on sustainability

• Continue to enhance disclosures of long-term risks and opportunities, including ESG related information, by both corporations and banks

• Improve information flow, data access and support the role of the banking sector in raising awareness in sustainability challenges and ESG risks

E.g. through platforms or centralised databases

Action Plan on Sustainable Finance

Later, they shared some key policy messages and expectations for the industry:

• Act proactively on ESG in business strategy for risk mitigation

Financial institutions shouldn’t wait until 2025 to act. It will be too late.

A proactive sustainability strategy is required, and banks have to reshape before it is too late.

• Incorporate ESG considerations into risk management

The objective is to find what kind of changes to slowly introduce in the balance sheet.

It is crucial to include brown in the taxonomy to aid in risk management. Banks can build on the EEMI taxonomy to better understand the brown side of their balance sheets.

• Promote climate-related disclosure including quantitative metrics and disclosure monitoring

A good ratio to start with is a green asset ratio. Banks can set a target of where they want to be in a few years, then show the market how they are working towards this target.

• Promote scenario analysis as an important step

• Support industry initiatives to understand ESGs

• Sensitivity analysis for climate risk in 2020

• Disclosure of key metrics - estimates and ranges with samples of volunteer banks

Hungary - Preferential Capital Requirements for Green Mortgages

“It takes more than one loan to bring about spring.”

Gábor Gyura, Head of Sustainable Finance at Magyar Nemzeti Bank

Playing with the typical saying “one swallow does not a spring make”, Gábor Gyura of the Central Bank of Hungary introduced us to the programme on Preferential Capital Requirements for green mortgages.

The Discount Program offers preferential capital requirements on loans for the purchase, construction, or renovation of energy-efficient homes.

Bank customers may also receive preferential interest rates.

The ratio of dwellings with Nearly zero-energy buildings (NZEB) energy performance, which are considered to be homes with a rating of BB or better, rose notably in 2018, but it is still very low (~2%).

The Hungarian EE Institute conducted research in the fall of 2016 via phone interviews and found that people would like to renovate.

But their research demonstrated clearly that the demand for modernization is also coupled with the need for financing.

Of course, as we have already said a few times before, this all depends on our satisfying our need for data.

But here’s the Catch 22 of energy-efficient mortgage data:

Without green mortgages, we can’t have accurate and actionable data; without data, we cannot determine the efficacy of green mortgages in order to promote adoption.

The solution is to work on data access on a European level. But we are still at regional or even provincial level.

Some of the main challenges noted included the:

• Reporting burden. Are incentives sufficient for banks?

• Costs for consumers - the red tape of it all

• Need for banks to internalize the new angle

• Dynamic nature of the taxonomy and national NZEB criteria

The programme will close in 2025.

In the meantime, there is talk of creating a platform where consumers can browse green financial products.

Indeed it seems that one of the challenges on the consumer side is helping people discover these green loans.

Some banks even wondered how they would convince these consumers to renovate their homes, and if it was even their job to do so.

Nonetheless, these issues are being considered and tackled.

Despite all of the obstacles and evident challenges, the initiative is ready.

Ready to build a label. Ready to go.

Luca Bertalot said they are just waiting for a message from the industry. The label will be created to eliminate bottlenecks and facilitate access to the market by consumers.

“The market is in a question mark mood. It is a giant question mark. But to answer the question we need the industry’s “go”.”

As the meeting drew to a close, Mr. Bertalot wanted to share a story.

He talked about the place for every good lobbyist in Brussels - outside the main door of the European Parliament.

In front of it is the Altiero Spinelli building, he said, named after the Italian politician who was imprisoned for 10 years by the fascist regime.

During his imprisonment he wrote the Ventotene Manifesto, a political statement that led to the birth of European Federalism.

For an imprisoned man, this manifesto was a beacon of hope. A hope for a new and better world.

And that was what was happening that Monday in the European Quarter of Brussels.

A group of financial institutions and other organisations were drafting our new beacon of hope for a new, cleaner and greener world.

Challenges:

• We need to improve EPC data access.

• EPC Data is already difficult to find. But many buildings also lack an EPC in the first place.

• EPCs are a huge cost for consumers, banks and investors. We need to lower EPC costs.

• There is a need for more data.

Takeaways:

• Initial observations suggest that energy performance influences risk.

• Most banks have an important part of their mortgage portfolio below C-rating, so they should aim to re-mortgage most of their portfolio.

• Banks can and should contribute by giving access to their internal mortgage portfolios.